Wednesday, April 1, 2009

>Daily Calls (ICICI Direct)

Sensex: We said, "Evening Doji Star pattern confirming Friday's Doji as a short-term turning point ... Though pull-back to Green channel is possible ..." Index did pull-back to the channel as expected, and closed 1.4% higher on the last day of FY0809. Cap.Goods pulled back most, up 3.2%. A/D ratio turned positive to 4:1.

The action formed Harami pattern, the high-low of which maintained inside previous day's range. Its high at 9826 retraced exactly 50% of the drop from Friday's high of 10127 to Monday's low of 9520. Proceedings can be positive initially for testing Monday's falling gap at 9902-13. Watch for resistance at the gap however.

To see full report: CALLS 010409


Key points
■ Market outlook — Open positive on positive global cues
■ Positive — Rupee expected to gain further, higher Asian cues
■ Negative – FII selling may have started again

Market outlook

■ Indian markets are likely to open firm following the strong trading session yesterday. We need to see whether the Sensex can break its recent high of 10200 odd. If it is able to sustain above these levels and trade there for a couple of sessions then we may see the up move gathering momentum. On the lower side if it breaks the range of 9200- 9400, then we may see some weakness creeping in again. For the positional traders we would advise trading in this range and look out for a decisive break of the range on either side to take aggressive trading positions. For a while we feel we would trade in this range and could witness some stock specific activity

■ The Sensex has supports at 9630 and 9550 and resistances at 9910 and 10010. The Nifty has supports at 2980 and 2920 and resistances at 3160 and 3190

■ Asian stocks were trading strong in the morning session. The Nikkei was up more than 2% and so was the Kospi. The Hang Seng and Straight Times were trading marginally in the green

■ US stocks climbed on Tuesday, driving the S&P 500 to its best month since October 2002, as investors snapped up top-performing bank and technology shares as the first quarter came to an end. The Dow gained 86.9 points, or 1.16%, to 7,608.9. The S&P 500 added 10.3 points, or 1.3%, to 797.8. The Nasdaq climbed 26.8 points, or 1.8%, to 1,528.6. Data showed business activity in the US Midwest shrank in March at the most severe rate since 1980 while house prices sank a
record 19% in January from a year earlier

■ Stocks in news: Kalpataru power, Aurobindo Pharma, Wockhardt

To see full report: OPENING BELL 010409

>Reliance Industries (MACQUARIE RESEARCH)

Countdown to first gas.....

■ In line with our recent Oil Yatra (tour) ‘Next Gen opportunity’ takeaways, the countdown to RIL’s first gas flows has begun. RIL has signed the Gas Sales and Purchase Agreements (GSPA) with 15 fertiliser units for supply of gas to be produced from the KG-D6 block. This will be followed by the signing of the GSPA with the existing gas-based power producers. RIL is expected to start gas production in the next few days and fuller supplies will start by mid-April.

Fertiliser GSPA paves way for sale of first gas. The fertiliser companies had raised certain objections to RIL’s draft GSPA regarding the take-or-pay clause, term of the contract, currency of payment etc. Almost all of these issues were resolved amicably; following which RIL signed GSPAs with 12 fertiliser companies for supply of ~15mmscmd of gas at 15 urea facilities.

GSPA with power plants to follow. The Empowered Group of Ministers have allocated top priority to the existing gas-based urea plants, followed by LPG plants, existing gas-based power plants and city gas for allocation of KGD6 gas. As KG-D6 gas is lean, during the ramp up of production to 40mmscmd, the power sector would get higher priority than the LPG sector.
We expect RIL to sign GSPA with the power plants as KG-D6 production is expected to increase from initial 10mmscmd to 40mmscmd by July 2009. Also RIL itself is already geared to offtake and is lobbying hard for nearly 20mmscmd at its existing refinery and petrochemical facilities.

Large gas deficit in medium term. During our recent Oil and Gas Yatra, the Fertiliser Association said the fertiliser sector has 40mmscmd of an additional requirement. In addition, two power majors, NTPC (NATP IN, Rs184, NR) and Reliance Power (RPWR IN, Rs101, NR), alone have the ability to offtake an additional 50mmscmd of gas, which compares with RIL’s planned production of 80mmscmd. Estimates of 10mmscmd of city gas distribution demand from 20 cities would be understated given longer-term plans for 230 cities.

Tip of the iceberg. During our Yatra, the Director General of Hydrocarbons (DGH) demonstrated that RIL’s KG-D6’s start-up is only the tip of the iceberg and there is a very large potential on the east coast. Currently, there are 11 seismic vessels working in the east coast and this will be followed by drilling when the blocks enter the subsequent phases. Initial data from deepwater blocks on the west coast also looks very promising. The hydrocarbon signatures on India’s east coast look similar to Qatar’s.

Earnings revision
■ No change.

Price catalyst
■ 12-month price target: Rs1,675.00 based on a Sum of Parts methodology.

■ Catalyst: New oil and gas finds and enhanced clarity on organised retail.

Action and recommendation
■ RIL has a large portfolio of highly prospective blocks and its exploratory success rate is the best amongst peers. We estimate RIL’s profits to rise 70% in FY10E, purely from volume growth, despite an assumed cyclical downturn.

To see full report: RELIANCE INDUSTRIES

>Index of Six Infrastructure Industries (INDIA CAPITAL MARKETS)

India’s ISII Growth - Sectoral - Sequential Period

• Overall Index of six Key Infrastructure Production (Electricity, Finished Steel, Crude Oil, Coal, Cement & Petroleum Refinery Products) - for India grew at 2.2% against 7.0% in Feb’08 and 1.5% in Jan’08.

• On a monthly basis, it has grown negatively at -3.5% in Feb’09. One of the major reason for this negative growth could be less number of working days in the month of February.

• The cement segment continues to post decent growth figures. The coal segment too has posted decent yearly growth on high base suggesting the continuing momentum in the sector. The steel production too has hold out this month. The crude oil and petrochemical segments are still under pressure. The electricity segment has once again grown negatively, however on a yearly basis it has posted 2.2% growth.

• The index is the barometer of the infrastructure activities and investment in the country as it includes all the key industries falling under the infrastructure.

• The IISL has a combined weight of 26.7% in the total IIP. Now a low growth in the infrastructure sector shows the possible signs of worse performance in overall IIP growth in Feb’09.

• The IISL growth for Jan ’09 was revised upwards to 1.5% compared to 1.4% provisional, owing to upward revision in Petroleum Refinery Products. The final revision for Nov ’08 IISL growth remains unchanged.

To see full report: ISII METER

>Bank of Baroda (ULJK Securities)

Bank of Baroda has posted a positive improvement in its return ratios driven by robust growth in the top line particularly non interest income. Asset quality of the bank also improved and the Gross NPA level now stands at 1.5%. Improvement in ROA will lead to an improvement in ROE, which we believe result in re rating for the stock. Looking at its sustainable growth prospect and attractive valuation, We recommend “BUY” on the stock with a target price of Rs.284 for a medium to long term horizon.


Continued focus on the asset growth. We expect the bank’s advances to grow at a CAGR of approx 22% during FY08A‐FY10E against management guidance of 25% growth. Priority sector status to the housing loan may result in a decent growth in the mortgage loan portfolio of the bank. In the FY10E, we expect much of the growth coming from the SME segment. The growth in the advances will lead to a decent growth in the NII of the bank resulting in stable net profit growth.

Non interest income continues to improve: We expect non interest income of the bank to grow at a CAGR of 18% during the period FY08A‐FY10E. We believe the growth would be coming from the fee income mostly trade related finance and business activities. Return Ratios continues to improve: The strong growth in the non interest income will result in improvement of return ratios of the bank. We expect the ROA of the bank to show an improvement of 9bps during the period resulting in ROE of 17% during the period FY08A‐FY10E.

Valuation: At CMP of Rs.220, BOB is presently trading at P/ABV 0.7x of our FY09E ABV of Rs.279 and at P/E 4x of our FY09E EPS of Rs.53.9. We recommend a “BUY” on the stock with a fair value target price of Rs.284 Discounting the FY09E ABV by 1x and FY10E ABV by 0.95x.

To see full report: BANK OF BARODA

>Global Trading Strategy (FIRST GLOBAL)

Into the Rally of Death, rode the 600

The Short Story.....

If you have seen little babies at work, here’s how they express their dislike for something: they simply turn their heads away, rather than bawl or make a face, polite little things that they are. It’s almost as if by doing so, they’ll have made the problem go away.

That’s precisely what we have been doing last three days with The First Global Systems Family. For it’s been so joyous…we have all been buying up all the beaten-up stuff across the world, and have been making 20-40% for the mere act of pressing a button. Heck, we have even made money in Russia.

But now The First Global Systems Family has been boring its eyes into our backs, even as we have avoided looking. The First Global Systems Family is telling us bad things about the market, so why on earth should we listen? We don’t want to hear distasteful things about this cute little global casino governments collectively have given us.

But we have also learnt, through hard lessons, that we shouldn’t ignore The First Global Systems Family’s tirades against such mini-bull markets. Remember our dictum: we never mess with the mob.

What The First Global Systems Family is saying that it’s beginning to like this rally less and less. Quantitatively, this rally is worsening in quality (make what you will of that). Globally, the rally is becoming deceptive. It’s beginning to resemble one of the poorest bear market rallies we have seen for a while now, in terms of the level of deceit.

All indicators on The First Global Systems Family’s dashboard are beginning to flash Red.

But aren’t we supposed to be in a hot new bull market?

Not if you believe The Family.

In fact, The Family is calling it The Rally of Death. Corny, but gets the message across effectively.

Now, calling the end to anything bullish is always so, so scary. The world will forgive you if you uttered the Buy word too soon. But utter the Sell word too soon, and not even your Family will forgive you.


>India IT Services Sector (UBS)

Can vendor consolidation offset revenue declines at top-tier companies?

We expect IT budgets to decline in 2009
We expect IT budgets to decline 2-20% in 2009 for Indian IT service clients. This will likely result in lower prices and flat volumes for the sector in FY10. We forecast a fall in US$ revenue of 5-7% and a decline in Rs EPS of 2-5% in FY10. We remain cautious on the sector and reiterate Infosys as our preferred pick.

Vendor consolidation to benefit top-tier vendors
We have analysed the impact of vendor consolidation through: 1) analysis of historical data; 2) meetings with management of IT companies and industry experts; and 3) analysis of IT buyer spending patterns. We conclude that top-tier companies will be able to largely offset the decline in IT budgets via vendor consolidation.

We prefer top-tier vendors
We believe vendor consolidation is a multi-year theme and that top-tier IT service providers will increase market share from 31% in FY08 to 36% in FY12E. Top-tier companies will outpace industry growth and return to a revenue growth trajectory of c15% from FY12E onwards.

Remain cautious on the sector; Infosys is our preferred pick
Infosys is our preferred pick in the sector based on high margin visibility and its positive growth outlook. We await better opportunities for Wipro and TCS. Demand uncertainty remains a key risk, but we believe valuations provide downside support for share prices.

To see full report: IT SECTOR

>Pantalooon Retail (Angel Broking)

Back in Business
Same Store Sales growth positive in January and February 2009

Pantaloon Retail (PRIL) recorded positive Same Store Sales (SSS) for the two consecutive months of January and February 2009, after having plunged and recorded negative growth in November 2008 and ruling weak in December 2008. Amidst the ongoing economic slowdown, Pantaloon’s Lifestyle Retailing Segment sprung a surprise registering higher SSS growth than Value Retailing in January 2009.

The Lifestyle Retailing Segment reported a better performance on the back of the month-long Great Indian Shopping Festival held by the Future Group in December 2008- January 2009 and increased consumer confidence compared to the last quarter of CY2008. The Segment witnessed healthy yoy SSS growth of 12% in January 2009 v/s 14% degrowth registered in December 2008. On the other hand, the Value Retailing Segment witnessed yoy SSS growth of 4% in January 2009 as against 3.6% degrowth in December 2008.

The positive trend continued in February 2009 with the Value and Lifestyle Retailing Segments recording yoy SSS growth of 5.3% and 4.4%, respectively. The sustained sales growth in February 2009 can also be attributed to aggressive pricing, continuous promotional efforts and availability of more credit for consumers following softening of Interest rates. Pertinently, on a yoy basis, SSS growth of PRIL Standalone is nearing July 2008 levels which is an indicator of revival in consumer sentiment.

To see full report: PANTALOON RETAIL

>Nitin Fire Protection (KARVY)

We recently met Mr. Rahul Shah, Director of Nitin Fire Protection (NFPIL) and he indicated towards disappointing 4QFY09 and difficult FY10E for the fire protection and safety business. However the company was bullish on the domestic CNG business.

In the fire protection and security business, the demand has been negatively impacted due to slowdown in construction activity - both commercial and residential. Of the various contracts awarded to the company, Nitin Fire has not been able to execute few of them because of the client's decision to slowdown or hold that particular project. Accordingly that would lead to difficult 4QFY09 for the company.

In the CNG cylinder space, in FY10E the company is looking to focus more on domestic market. Pakistan is major market for CNG cylinder business, but the current relationship with Pakistan is expected to hamper the export activities from India. Also, the company believes that CNG
cylinder business in India would grow at a robust pace thereby providing them the opportunity to supply their products in the domestic market. Since the company's plant is situated in SEZ, domestic sales would attract full income tax rate as against income tax exemption enjoyed by the
company on export sales. We expect capacity utilization of 20% and 40% for FY09E and FY10E respectively at the company's 500,000 cylinder capacity plant at Vizag (Andhra Pradesh). In the industrial cylinder segment due to slowdown in the industrial activity, we expect the company to sell ~73000 cylinders in FY10E, which is 20% lower than our FY09E estimated sales volume of ~91000 cylinders.

Due to the above mentioned reasons, we are lowering our sales estimates from Rs2,758mn to Rs2,380mn for FY09E and from Rs3,265mn to Rs2,910mn for FY10E. For FY09E, we are lowering our EBITDA margin estimates from 19.2% to 17.7% primarily on account of MTM losses expected during 4QFY09 due to depreciating rupee. For FY10E, we are increasing our EBITDA margin estimates from 21.5% to 22.2% on account of fall in commodity prices and due to higher contribution of CNG cylinder in the overall business mix. We are lowering our net profit estimates from Rs397mn to Rs323mn for FY09E and from Rs502mn to Rs429 mn for FY10E. For FY10E, due to expected higher domestic sales from the SEZ unit, we have increased our effective tax rate from 24% to 29%.

We expect the company's earnings to grow by 32% during FY10E primarily on back of better capacity utilization of the company's Vizag plant. However due to slowdown in the construction activity and corporate capex plans; we expect the company's fire protection and industrial cylinder segment would be hampered in FY10E. On back of lowering of our EPS estimates and lowering of PE multiple to reflect the current market valuation, we are reducing our price target by 33% to Rs160 and change our recommendation from BUY to Outperformer.

To see full report: NITIN FIRE PROTECTION


Company Brief
LIC Housing Finance Ltd. (LICHFL) is one of the largest housing finance companies in India. Almost 93% of the company’s loans are to retail customers and the balance 7% to project developers. The promoter, namely LIC of India, meets 8% of the total fund requirements, whereas 80% is funded by term loans from banks, bonds and debentures, and the remaining 12% in the form of refinance from NHB and others.

■ LIC Housing is relying more on floating rate borrowing and lending, which will help the company to protect margins in a volatile interest rate scenario and ensure stable growth in profitability in the future.

■ The last quarter witnessed decline in both gross and net NPA levels. The net NPA fell from 0.9% in Q2FY09 to 0.7% in Q3FY09. NPA levels are expected to fall further because the company has now adopted stringent credit appraisal method and better recovery process.

■ LICHF has been steadily growing its loan book with loan sanctions and disbursal growing at a CAGR of 30% and 20% respectively in the last three financial years. Given the cost of
funds coming down and interest rate easing further, we expect LICHF to grow its loan book at a CAGR of 21% over a period of FY2008-10 (E)

■ We have valued the company using SOTP method based on the valuation of its core business at Rs 280 and 39.3% stake in LIC Mutual Fund at Rs 23 and arrived at a target price of Rs 303, implying a potential upside of 61% from current levels, over a 12 month period. The current market price discounts FY09E and FY10E adjusted book value by 0.69 x and 0.55 x respectively. The stock also provides an attractive dividend yield of 5%, assuming that status quo is maintained. We therefore recommend a BUY on LIC Housing Finance.

Risk & Concerns

■ Challenging real estate market: The real estate market in India is becoming a lot challenging. This could lead to marked slowdown in business and higher delinquencies.

■ Stiff competition: The Company could see loss of market share to commercial banks and pressure on spread due to interest rate cuts announced by PSU banks on home loans.

■ High exposure to project developers: The Company has made a deliberate strategy to increase exposure to project developers, which could also increase its NPA levels.

■ Increase in the average loan size: An increase in the average loan size might result in nonrepayment, increasing NPAs and hurting profitability.

To see full report: LIC HOUSING

>US gasoline hits USD2, unlikely to soar without demand growth (COMMODITY)

New York - U.S. gasoline prices at the pump have broken out of a four-month slump, hitting $2 a gallon, but weak demand will likely keep prices from soaring this summer.

The average price of retail gasoline in the U.S. has climbed more than 11cents a gallon in the past month to $2.046 a gallon Monday, according to the Energy Information Administration, the statistical arm of the Department of Energy. Rising prices in the early spring are an expected seasonal pattern, but this year's price increase doesn't signal a return to seasonal trends usually witnessed during more stable market conditions.

Without a resurgence in demand, prices may not rise significantly during the summer driving season from Memorial Day to Labor Day. Growing unemployment, a preference for cars with better gasoline mileage and lingering economic worries may keep demand low, depressing prices.

"This has been a demand-driven market," said Dave Hackett, president of with Irvine, Calif.-based Stillwater Associates LLC. Gasoline consumption has fallen as prices last year that topped $4 a gallon prompted drivers to buy cars with better gasoline mileage.

The Obama administration's task force on Detroit's automakers has stressed the production of fuel-efficient vehicles, to conform with consumer preferences and government standards.

The administration's focus on reforming the automakers, including Chrysler LLC and General Motors Corp. (GM), could result in the creation of a vehicle fleet that complies with more stringent efficiency standards, thus further reducing gasoline demand. The Obama administration could use bankruptcy protection filings to split GM and Chrysler into "good" and "bad" components, The Wall Street Journal reported Monday, citing people familiar with the matter. In its leading plan to address the auto maker's troubles, the government would like to purge the companies of the biggest problems, including their onerous debt burden.

Falling auto sales, which have exacerbated the financial struggles of auto companies, have accompanied falling gasoline demand as unemployment has risen. About a third of gasoline consumption in the U.S. is work-related, so an increase in the number of jobless will continue to cut fuel demand, said Tancred Lidderdale, a petroleum supply analyst at the EIA.

The national unemployment rate was 8.1% for February, the most recent month for which data is available. Despite the current economic stimulus measures adopted by Congress, some economists have forecast growing unemployment through the end of the year.

As the newly unemployed quit commuting, gasoline demand may not pick up enough to offset rising production from U.S. refineries.

Flooding The Market

Ordinarily, refiners perform annual maintenance in the spring, cutting back production as they prepare their units for the summer driving season. During this downtime, they are able to liquidate winter-grade gasoline, a blend that cannot be sold in the summer due to environmental requirements.

This year, most refiners shut their units early in the year, due to low demand for gasoline. As a result, inventories fell in February, prompting a rise in pump prices to rise.

As these units return to service, they're producing gasoline that refiners will have to sell before the grade change. The additional supply may dampen the price of gasoline this spring said Ann Kohler, an analyst with Caris & Co., a New York-based investment bank.

Demand for the past four weeks has been about 0.5% below last year's levels, said Kohler, citing preliminary federal data. This demand decline may make it difficult to absorb this additional production.

"Realistically, we're prepared to see demand flat," said Jeff Lenard, a spokesman for the National Association of Convenience Stores, a trade association representing gasoline station owners.

A sudden spike in crude prices could also drive gasoline prices up. While there was a run-up in crude prices from February to last Thursday, the price of benchmark crude futures dipped below $50 a barrel Monday.